You may have heard the news about Compania Anonima Nacional Telefonos de Venezuela (VNT). The short version is that Venezuelan President Hugo Chavez is threatening to nationalize the company.

As a result, shares of VNT dropped more than 10% on Monday and were off by more than 27% on Tuesday. This article will not be a dissection of Venezuelan politics, but is about the portfolio-construction aspect of this type of event, which is a death blow, or potential death blow, to a theme you thought would work.

First, I believe this episode helps to debunk one myth. Often, people who talk about foreign investing assign some measure of extra safety to a stock by virtue of its listing on the NYSE. It is true that there is more paperwork required to list there, but the notion that a company is somehow immune from disaster is not a good bet.

There are tens of thousands of foreign companies to invest in, and the chance that they will fail or get news like VNT is the same, regardless of where these stocks list. You no doubt recall the demise of Yukos and Mikhail Khodorkovsky. Yukos was not NYSE-listed, but I am quite certain that if Khodorkovsky was running OAO Tatneft, which was listed until recently, and had been for years, it and not Yukos would have been taken out.

If you invest in emerging markets via individual stocks or single-country funds, you may be taking on the risk that something crazy could happen. This risk taken is not necessarily a bad thing, but anyone investing in these countries needs to understand the risk they are exposed to and the steps to take to mitigate that risk.

By far the simplest thing one can do is to not buy too much into a theme no matter how great an idea it seems. I guarantee there are investors (both professional and do-it-yourselfers) that have learned the hard way that they have too much in VNT.

For emerging-market stocks like this, I tend to start out with a 2% weight and then trim back if it goes up a lot. The person who bought VNT last week at $20 with a 2% portfolio-weighting is simply having a bad day. They have not set their portfolio back two years by virtue of a lopsided bet gone bad.

Exposing Your Diversity

Another necessary aspect of this discussion is selecting the countries that you invest in. Using a less dramatic example, the commodity correction of the last couple of weeks has hit certain markets harder than others.

If your emerging-market exposure consists of two countries, that's not unreasonable, but if those two countries are Brazil, as measured by iShares MSCI Brazil ( EWZ), and South Africa, as measured by iShares MSCI South Africa ( EZA), you can see that both look very similar, and neither one has done very well in the last couple of weeks. Both are commodity-based economies, so it makes sense that they would correlate so closely.

But if these two are your only exposure, you are less diversified than you might believe. Notice that Malaysia, as measured by iShares MSCI Malaysia ( EWM) (which is not a commodity-based economy despite being a big producer of palm oil), seems unaffected by this correction.

When commodities are doing well, the EZA/EWZ combo will do better than a pairing of either one with EWM, but the latter combo offers better diversification.

It ultimately boils down to how aggressive you want to be in your portfolio. Many behavioral finance studies conclude that the pain from losses is much worse than the joy of gains. In other words, we feel losses a lot more intensely.

The bottom line? If you don't diversify your emerging-market allocation -- i.e., beyond Venezuela -- you'll be feeling some serious pain during stretches like this one.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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